A new opportunity to boost trustees’ bottom line
The increase to the non-concessional cap for the 2014/2015 financial year provides various opportunities for SMSF members to boost their superannuation account balances.
From 1 July 2014 the non-concessional contributions cap increased from $150,000 to $180,000 for the 2014/2015 financial year. Where a member is under age 65 at 1 July 2014 they also have the ability to bring forward the next two financial years’ non-concessional contributions caps. This effectively creates a three-year period where non-concessional contributions of up to $540,000 can be contributed without exceeding the non-concessional contributions cap.
Making a contribution to an SMSF
There a number of ways in which a contribution can be made to an SMSF. SMSF members may also have the option of transferring an existing asset to the SMSF using a process commonly referred to as an in specie asset transfer or in specie contribution.
An in specie contribution refers to a contribution made via the transfer of an asset (other than cash) to an SMSF where the fund either pays no consideration or less than the market value of the asset. The contribution is made on the date the fund obtains beneficial ownership of the asset, which may be earlier than legal ownership.
Asset being transferred is…
Date of contribution is when…
Business real property
the fund obtains the necessary documents and title deeds to register the fund as the legal owner
the off-market share transfer is completed to registrable form
Widely held trusts
the fund obtains beneficial ownership or legal ownership, whichever is sooner
Certain insurance policies
Assets that can be transferred to an SMSF
One of the investment restrictions on trustees is the general prohibition on funds intentionally acquiring assets from a related party of the fund. However, there are a number of exceptions to this rule and these include the acquisition of:
• business real property acquired at market value
• listed securities acquired at market value
• in-house assets acquired at market value where the acquisition of the asset would not result in the level of in-house assets in the fund exceeding 5 per cent of the fund’s assets
• a life insurance policy (other than a policy acquired from a member or relative) acquired at market value
• units in a widely-held unit trust (e.g. managed funds) acquired at market value
‘Market value’ is an amount that a willing buyer of the asset could reasonably be expected to pay to acquire the asset if: the dealings were at arm’s length, the sale was appropriately marketed, and the buyer and seller acted knowledgably and prudentially in relation to the sale.
Benefits of making an in specie contribution
Transferring investments as contributions to an SMSF can provide many advantages, especially where members have insufficient cash to make the contribution or the SMSF has insufficient cash to purchase the asset. An in specie contribution may also involve the transfer of a single asset, but cover a number of different contribution types.
Example: Rob and Marnie have a commercial property valued at $1.14 million which they would like owned by their SMSF. Their SMSF cannot afford to purchase the property outright so they are considering making an in specie contribution to their SMSF. The transfer can be allocated as $540,000 non-concessional and $30,000 concessional contributions (if eligible) each for both Rob and Marnie.
Personal contributions can be accepted for assets held individually or jointly, but the treatment of assets transferred from a company or a trust can be more complicated.
Additional benefits of transferring assets into an SMSF may include:
• any increase in asset value is achieved in the concessionally taxed superannuation environment
• income such as dividends and capital gains are taxed in the SMSF at concessional rates if the fund is in accumulation phase or tax-free on assets used to pay an income stream
• franking credits arising from the ownership of listed securities or units in a unit trust can be applied against any tax payable by the fund and any excess credits will be refunded to the SMSF
When transferring business real property, listed securities or investments in a widely held unit trust to an SMSF, members need to consider the following:
• income tax and capital gains tax implications of the transfer, including possible eligibility for small business capital gains tax concessions
• stamp duty (if applicable)
• the appropriateness of the investment to the fund’s investment strategy (particularly liquidity and diversification issues)
Stephen Bone is technical services manager at ANZ Wealth